Worried by the rapid roll-out of Exchange Traded Funds in major markets in the last few years, the International Organisation of Securities Commissions has advised stock exchanges to tread with caution.

This, according to the commission, is because of the huge risks associated with those kinds of funds in the capital market.

IOSCO in a statement signed by its Head, Media Enquiries, Ms. Carlta Vitzthum, and made available to our correspondent on Thursday, noted that risks of shock transmission, misconduct and financial stability risks were usually associated with ETFs.

An ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange; it also experiences price changes throughout the day, like stocks, which are bought and sold.

The Nigerian Stock Exchange, had last December last year, listed the first ETF — ABSA NewGold ETF, with a total market value of N1.01bn.

The Chief Executive, NSE, Mr.Oscar Onyema, said the Exchange was envisaging a growth in the global ETF market in the years ahead with a positive spill-over effect in emerging markets.

Vitsthum noted in the statement that IOSCO was proposing some principles aimed at guiding the operations and by which regulators could assess the activities of the funds.

While confirming that there was increased interest in ETFs worldwide as evidenced by the significant amount of money invested in those types of products over the years, Vitzthum said that the dynamic growth had drawn the attention of regulators who were concerned about the potential impact of ETFs on investors and the marketplace.

He stated that to this end, IOSCO had published a consultation report, titled, ‘Principles for the Regulation of Exchange Traded Funds’, which examined the key regulatory issues regarding ETFs.

He explained that the report proposed 15 principles that reflected a level of common approach and were a practical guide for regulators and industry practitioners.

Vitsthum said, “Fourteen of the proposed principles are categorised under the following three headings: Principles related to ETF classification and disclosure; Principles related to Marketing and Sale of ETFshares and Principles related to the structuring of ETF.

“The Consultation Report also considers the potential broader risks to financial stability arising from ETFs and other ETPs, and suggests that regulators should bear in mind that recommendations made for the ETF industry may be applied elsewhere to other areas of financial services.”

He added that the potential broader risks included risks arising on secondary markets (the risk of shock transmission); ETFs and market integrity (risk of misconduct) and risks to financial stability.

“The 15th principle for the regulation of ETFs relates to the broader risk of liquidity shocks and transmission across correlated markets.

Source: Punch/Udeme Ekwere